Throwing Good Money After Bad

Obama lets Wall Street rescue itself at our expense.

If a crisis is a terrible thing to waste, why then has the Obama administration squandered its opportunity to use the bank bailout to institute much-needed structural reforms in the financial sector? Andy Kroll gives a depressing critique of the TARP bailout (Troubled Asset Relief Program) and the many other taxpayer subsidies of reckless, lawless and inept business behavior.

Kroll’s piece, which has been picked up by The Nation, Salon and other websites, describes “six of the most blatant and alarming ways taxpayers have been scammed by the government’s $1.1-trillion, publicly-funded bailout.” Kroll notes that “the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and — with the exception of the automakers — letting companies take taxpayer money without a coherent plan for how they might return to viability.”

He points out that the TARP program (actually twelve separate programs) is only a small part of the rescue of American capitalism. It does not include the more than $12 trillion that the U.S. government and the Federal Reserve have contributed in other ways to prop up failing businesses.

Kroll accuses the U.S. Government of paying way too much for troubled TARP assets, and then providing so little transparency that there can be little serious accountability. Economist Dean Baker says that government officials “see this all as a Three Card Monte, moving everything around really quickly so the public won’t understand that this really is an elaborate way to subsidize the banks” and the nation’s richest households.

Kroll notes that the bailout’s newer programs give private investors a favored position to make money while leaving taxpayers carrying most of the risk. The idea of public-private partnerships to save the economy sounds reasonable, but what it really means is forcing taxpayers to invest most of the money and shoulder most of the risk, but letting private investors reap most of the profits. Same as it ever way, same as it ever was.

What makes this particularly depressing, however, is Obama’s failure of nerve. Kroll writes, “The government has no coherent plan for returning failing financial institutions to profitability and maximizing returns on taxpayers’ investments.” Everything is being improvised among small cliques of Wall Street insiders, with little public debate or accountability. It should come as no surprise, then, that the bailout is geared to the needs of the nation’s largest banks, giving short shrift to the troubled small and mid-sized banks that serve most Americans.

Finally, the government is not pushing for structural reforms to avoid future meltdowns. Instead of breaking up the mega-banks that are “too big to fail,” the government is propping them all up with borrowed money. Instead of prohibiting risky, over-leveraged investments, the bailout is essentially banking on the same strategies that Wall Street used before the metldown.

Instead of sending banks and financial companies a message that its reckless business practices won’t be tolerated in the future, the government is signaling that they WILL be tolerated and not punished. Indeed, beleaguered taxpayers will be coerced to subsidize such misbehavior!

The actual facts about the financial crisis probably won’t be known for years. Yet the facts already known suggest a terrible betrayal of taxpayers and citizens has occurred, and will continue. The pathologies that got the U.S. and the world into this crisis remain largely uncorrected. Our tax dollars are propping up a failed paradigm, and the very people who precipitated the crisis have not been called to account. Instead, President Obama has assigned them to supervise the recovery.

Obama may be a masterful politician with the common touch, but where is the respect for ordinary citizens? For taxpayers who are collapsing under this crisis? Who has the courage to demand equitable stewardship of taxpayer resources and, even more important, an ideological reckoning?